Much like traditional financial markets, crypto markets are not “immune” to manipulation. This, according to an update from CertiK.
CertiK explained in an extensive update that many of the same practices that plague stocks and commodities — such as wash trading, “spreading fear, and pump and dump schemes” — also very much exist in the crypto space (after all, both are financial markets sharing similar fundamental characteristics).
But the update from CertiK also mentioned that crypto’s decentralized and largely unregulated nature often makes it an even more “fertile ground for manipulation.”
Certik also noted that from professional traders to market makers to financial institutions, bad actors use a range of tactics with the goal of “swaying prices to their advantages.”
CertiK has examined some of the most “common manipulation tactics” in the crypto markets and discuss how these practices impact the industry as a whole.
CertiK stated in their comprehensive update that wash trading is “one of the most notorious forms of market manipulation, and occurs when someone buys and sells the same asset repeatedly to create the impression of high volume.”
CertiK further explained that by inflating the activity of “a crypto asset, manipulators can trick investors into believing the asset is more liquid or valuable than it actually is.”
In 2019, Bitwise Asset Management reported that approximately 95% of Bitcoin’s trading volume “on unregulated exchanges was faked through wash trading.”
According to the CertiK update, this figure illustrates that “significant portions of trading activity of crypto assets can be driven by deceptive practices rather than genuine interest.”
CertiK added that spoofing involves placing “large buy or sell orders without the intention of executing them, to create an illusion of demand or supply.”
As explained by the CertiK team, this false signal can “cause prices to shift, allowing the manipulator to benefit from the rapid reaction.”
Certik also mentioned in its in-dpeth update that bear raiding is typically used to push “down the price of an asset.”
The blockchain firm also stated that manipulators “short a large amount of an asset or sell huge quantities to trigger panic selling, creating a cascading effect that drives prices lower.”
As explained in a blog post by CertiK, bear raids often “occur during periods of market uncertainty, amplifying fear and motivating investors to dump their holdings.”
They added that this method can be “especially effective in crypto’s already volatile environment, where a single action can spark a sharp, unexpected price drop.”
The update from CertiK further noted that FUD tactics rely “on spreading negative or misleading information to create doubt in the minds of market participants.”
The CertiK team pointed out that FUD could involve a rumor of government crackdowns on crypto, “fabricated news of exchange hacks, or exaggerated reports about project failures.”
For example, back in the year 2017, rumors had circulated about China’s ban on cryptocurrency exchanges, which “drove down the price of Bitcoin by approximately 30%.”
Another notable example, shared by blockchain company CertiK, is that of FUD when Jamie Dimon, CEO of JPMorgan, referred to Bitcoin as a “fraud,” causing uncertainty in the market, despite his company’s later “involvement in blockchain technology.”
Although not necessarily an act of market manipulation, public comments like these can “lead to panic selling and volatility.”
The update from CertiK also mentioned that “a sell wall occurs when a manipulator places large sell orders at a specific price level, creating a barrier that prevents the asset’s price from rising beyond that point.”
These massive orders can intimidate other traders, “who assume that breaking through the wall will be difficult.”
Once enough tokens have been bought at lower prices, the “manipulator removes the wall, allowing the price to spike.”
This tactic is often used by market makers and “high-volume traders to accumulate assets cheaply.”
The blog post from CertiK added that one of the oldest manipulation tactics, pump and dump schemes involve “artificially inflating the price of an asset through coordinated buying (the pump) and then selling off once prices peak (the dump).”
Usually, this scheme is orchestrated by a certain group of traders or influencers who tend to “hype up a low-liquidity token, often in private chat groups or on social media, convincing retail investors to buy in.”
Once the price rises, the manipulators the proceed to “sell off their holdings, leaving latecomers with losses.”
In October of this year, the U.S. Federal Bureau of Investigation (FBI) took unprecedented action with “Operation Token Mirrors,” creating a fake cryptocurrency NexFundAI to “catch fraudsters in the act.”
The operation revealed a $25 million pump and dump scheme where traders manipulated the token’s trading volume and price to “lure in unsuspecting investors. Once the price had risen, the orchestrators dumped their holdings, causing the price to plummet. These actions resulted in charges against 18 individuals for market manipulation and conspiracy.”
The Role of Market Makers
As explained in the blog post by CertiK, market makers in crypto are supposed to provide liquidity and “facilitate smooth trading by consistently offering buy and sell orders.”
Unfortunately, some market makers tend to use their positions to “engage in manipulation — particularly wash trading and spoofing.”
By controlling a “large part” of an asset’s liquidity, they can influence “price movements for their own benefit.”
Although market makers play a necessary role in any trading ecosystem, the decentralized and sometimes “opaque nature of crypto gives them more room to engage in manipulative practices.”
The update from CertiK also mentioned that this is why regulators like the SEC have started taking action “against some crypto firms, attempting to curb these abuses. But as it stands, enforcement remains tricky.”
Market manipulation can be “difficult to spot,” but here are some things to keep in mind to minimize your exposure:
- Check Token Longevity: One of the easiest ways to avoid falling victim to pump and dump schemes is to check how long a token has been trading.
- Use Exchanges with Transparency Measures: Some exchanges have taken proactive steps to curb market manipulation by improving transparency and auditing trading volume.
- Stay Informed and Analyze Carefully: Pay attention to large buy or sell orders that disappear quickly, sudden surges in volume without news, and widespread rumors with no credible sources.